Moneycontrol Pro Panorama | GST is flexing its muscles, will India Inc follow suit?

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What should one make of the buoyancy reflecting in GST revenues? It does not seem to square with the picture of slowing consumption that has been emerging from corporate commentary. Remember that GST is a tax on consumption unlike the earlier system, where excise duty was a tax on production and VAT was levied by states on sale of goods. While the government has taken steps to lower the complexity in GST and improve compliance, there has been a discussion around increasing the revenue neutral tax rate (compared to the tax burden pre-GST) by increasing taxes on several items.

In fact, it was in June 2021 that GST collections were below the Rs 1 lakh-crore mark. In July 2021, they crossed this level and picked up speed since October 2021, when it crossed the Rs 1.3 lakh crore mark. April has seen it increase to Rs 1.68 lakh crore. One explanation that’s been doing the rounds is that the formal sector has taken a leap due to the hit to small businesses from the pandemic-related shutdowns and impact on the economy. Also, after a complete lifting of lockdowns, the service economy may be roaring back to life as usual, as offices gradually fill up and entertainment and travel reopen. Read: Chart of the Day | April manufacturing PMI will add to the pressure on RBI to raise rates

Then, inflation may be playing an important part. Inflation also aids the formal sector’s growth, as it is better equipped to manage a situation when costs are rising continuously. But inflation also leads to an increase in the price of goods.

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To give you an example, the 5 percent GST on edible oil that cost Rs 100 a year ago and now costs Rs 180 means the government is netting Rs 4 more in GST than earlier. In the next stage, when a company makes instant noodles, where the cost of oils, flour, other inputs and packaging material has become expensive, the noodles-maker also hikes the product price to cover these cost hikes and maybe by a little more too. Here also, the tax (net of input tax credit) will be higher. As providers of goods and services pass on price increases, the tax collections may also be inflating.

But note that GST collections may be increasing but may not necessarily reflect in an across the board improvement in corporate performance. Consumer companies are talking about how consumers are looking to save money and how discretionary consumption is getting affected. Hindustan Unilever’s chief executive expects further price increases, to compensate rising input costs. That can’t be good news for demand.

Coming back to the uptrend in GST revenues, it eases pressure on the government to generate revenue. It also raises a question of whether a wholesale rejig of the GST structure is required as that may lead to a lot of chaos in the marketplace as seen in earlier rejigs. If the process of improving compliance and simplifying procedures is cumulatively leading to better revenues, aided by inflation, then maybe a few tweaks are only needed. Why fix something if it’s not broken?

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Ravi Ananthanarayanan
Moneycontrol Pro